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U.S. Treasuries rally is losing steam

SHARE U.S. Treasuries rally is losing steam

NEW YORK — Think it's wise to bank on Treasuries now that the much-awaited economic slowdown seems to be taking hold? Think again, some investors said.

The rally that produced returns of as much as 14 percent this year is also set to lose steam, even after a string of economic figures — including Friday's job report — suggested the economy is slowing enough to quell inflation and preclude further interest-rate increases by the Federal Reserve.

Ten-year note yields, at 5.89 percent, are now close to levels that "fairly" depict the degree of slowing apparent in the economy, said Glenn Migliozzi, who heads fixed-income trading at Fleet Investment Advisors in Boston. That means a repeat of the 10-year yield's 90 basis-point drop from January will be a tall order, he said.

"Treasuries are not a screaming buy anymore," Migliozzi said. "We'd need major signs of economic moderation for us to really get much, much lower on the 10-year" yield now, so "what we like are mortgages" that are rated the same as Treasuries and offer yields that are more than 1 percentage point greater than U.S. debt, he said.

Treasuries rose today after the government said businesses added 138,000 jobs last month after creating 242,000 positions a month earlier, while unemployment held steady. The 10-year yield dropped to near a four-month low, while the current two-year note yield hit a seven-and-a-half month trough at 6.13 percent. The 30-year bond yield fell to 5.71 percent, close to the 5.67 percent 2000 low reached in April.

The report also spurred more bets that interest rates would not rise at this month's Fed policy meeting, or even by year-end. That's based on declines for implied yields on all active fed funds futures contracts —the futures market's closest match to expected changes in the central bank's target rate.

The employment report "is a positive story for the market, though not wildly bullish," said Doug Porter, a senior economist at Nesbitt Burns Inc., which doesn't forecast an August rate increase. The Fed has raised its target for overnight lending between banks six times for a total 1.75 percentage points since June 1999 to keep the economy's record expansion from sparking faster inflation.

Today's advance adds to gains in recent months sparked by reports on manufacturing, employment and housing pointing to a cooling in the economy's record expansion. That said, the economy is still growing.

Just last week, a report showed gross domestic product grew at a faster rate in the second quarter from the first, suggesting the economy was still too hot. With that, lingering doubts of a lasting slowdown have kept some investors from looking for a rally of first-half proportions in government debt.